A leveraged buy-out finances an acquisition mainly with debt, repaid from the target's cash flows. The mechanism is elegant; it is also unforgiving for companies that lack the shoulders for it.
Leverage is not a performance, it's a constraint
Acquisition debt isn't repaid with promises of growth: it's repaid with cash, every quarter. So the first question isn't the ticket size, but the recurrence and predictability of cash flows. A company whose earnings depend on a few non-recurring contracts will carry leverage poorly, whatever its size.
Why "thresholds" often mislead
People say an LBO starts at a given EBITDA level. In practice, two companies of the same size can have radically different debt capacity. What matters:
- Margin and its stability over time.
- Intensity of capex and working-capital needs.
- Cyclicality and sensitivity to the economy.
- Customer and supplier concentration.
- The quality and autonomy of the management team.
What sinks a "too small" LBO
On smaller deals, the risk isn't leverage itself but structural fragility: reliance on a key manager, hard-to-cut fixed costs, little room to manoeuvre in a downturn. An over-tight structure turns the slightest surprise into a liquidity crisis.
Our read
We think company first, structure second. A good LBO is almost one you could do without: a healthy, profitable, well-run business to which leverage adds efficiency without removing its capacity to absorb a shock. The investor's job is to size debt to serve the business plan, never to jeopardise it.
This article is for educational purposes and does not constitute investment, legal or tax advice.